MARKETS SPECTATOR: RCR's ebbing tide?

RCR Tomlinson may be faring better than other resources stocks, but its post-Norfolk Group acquisition strategy is unlikely to give it further momentum.

Few stocks have weathered the downturn in the mining sector better than RCR Tomlinson. The stock is up 43 per cent in the last 12 months compared with the 22 per cent gain in the S&P/ASX200 Index. At 1426 AEST RCR shares were up 4 cents, or 1.6 per cent, to $2.50.

Paul Dalgleish, RCR’s managing director, said in an ASX statement today the company's total shareholder return has been 625 per cent since May 2009. RCR is acquiring Norfolk Group, an engineering firm with $902 million in annual sales, for $78 million through its own cash and loans.

Dalgleish wants to grow the company’s energy business in South East Asia and is trying to win large energy, power and resources contracts. Post-acquisition, RCR’s revenue mix will be 56 per cent from infrastructure, 34 per cent from resources and 10 per cent from energy. Norfolk will be rolled into RCR’s infrastructure businesses.

RCR’s post-acquisition net debt will be $80 million and its debt to equity will be 35 per cent, while annual revenue is forecast to be $1.8 billion. But Dalgleish is subdued about the company’s mining business, saying only “current prospects remain solid” as the unit focuses on cost cutting. Its energy business is bidding for closed-cycle power plants, while there are recurring maintenance and upgrade contracts with Australian utilities.

RCR's resources unit says it is doing “extended work” for BHP Billiton, Fortescue Metals Group, Woodside Petroleum and Newcrest Mining. Fortescue has employed RCR’s power unit at its Solomon mine, while BHP Billiton has awarded the unit a contract.

But Dalgleish can only point to general initiatives by its energy, resources and power businesses to win contracts, especially for its energy business in South East Asia. It may try to acquire another company, says Dalgleish.

RCR’s managing director may be playing coy about his company’s prospects but on face value it seems unlikely the company will win substantial business this year. Even if the stock is trading at 9.5 times price earnings compared with 21.2 times the S&P/ASX200 Index, according to Bloomberg, it’s hard to make the case to be bullish on RCR shares.